Debt charities and money experts have warned the most vulnerable customers may be forced to pay double the fees after banks hiked overdraft costs in response to a regulator clampdown designed to protect the poorest consumers.
Banks and building societies make more than £2.4bn a year from overdrafts alone, with around 30 per cent of that from unarranged overdrafts, when account holders go into the red without having agreed the borrowing in advance, according to regulator the Financial Conduct Authority (FCA).
More than 50 per cent of banks’ unarranged overdraft fees came from just 1.5 per cent of customers, especially those living in deprived areas. In some cases, unarranged overdraft fees can be more than 10 times as high as fees for infamous payday loans.
In a bid to curb the costs, the FCA is banning fixed fees for borrowing through an overdraft, instead using one, clearly advertised, simple annual interest rate from April next year. Banks and building societies will have to stop charging higher prices for unarranged overdrafts than arranged overdrafts.
Meanwhile, in a change that came into effect this week, they will also have to help customers reduce repeat overdraft use and do more to identify those in financial difficulty. Other changes, demanding that customers are clearly made aware that refused payments could result in extra charges, have already come into effect.
Announcing the rules, the biggest shake-up in overdrafts for a generation, earlier this year, Andrew Bailey, the chief executive of the FCA who will become the governor of the Bank of England in March, said: “The overdraft market is dysfunctional, causing significant consumer harm.
“Our radical package of remedies will make overdrafts fairer, simpler and easier to manage. We are simplifying and standardising the way banks charge for overdrafts. Following our changes, we expect the typical cost of borrowing £100 through an unarranged overdraft to drop from £5 a day to less than 20 pence a day.
“The decisive action we are taking today will give greater protections to millions of people who use an overdraft, particularly the most vulnerable.”
But the response from banks and building societies has been to dramatically hike arranged overdraft charges. HSBC, M&S Bank, Nationwide, First Direct, Monzo and Starling Bank have all announced new overdraft interest rates of up to 39.9 per cent, with others expected to follow.
The hikes have been met by anger from customers and accusations of unfairness by financial experts, debt campaigners and politicians.
‘We fear what banks will do next’
“Vulnerable customers living in deprived areas are far more likely to be hit by unplanned overdraft fees, and end up paying double what those in better-off areas pay,” warns Peter Briffett, CEO of the financial wellness app Wagestream.
“We welcome the FCA’s ambition to simplify overdraft charges, but we have already seen a number of banks hiking their rates ahead of this statement, so we will wait to see how the rest react.
“A simpler system of fees should make it easier for customers to compare bank accounts, but we fear that banks will find alternative ways of extracting this profit from their most deprived customers.
“This is the reality of the poverty premium.”
The FCA has said it anticipated the interest rate increases by banks and argues consumers will still be better off because the simpler fee structure will boost competition and prevent further hikes.
But it isn’t clear how banks will cover the recurring lost revenue from unarranged overdrafts in the longer-term, and if overdraft fees are out of bounds, they could decide to increase charges on other products, warns Salman Haqqi, a personal finance specialist at money.co.uk.
“In the meantime, in light of the FCA ban, we advise consumers to familiarise themselves with their bank’s overdraft fees, and then compare with the wider market,” he says.
“If you are someone who is regularly going into overdraft during or at the end of the month, and your bank’s overdraft fees are not the most competitive in the market, then it might be time to switch banks, to one that offers more favourable overdraft rates.”
Alternatively, taking out a personal loan, even with the same bank, rather than slipping into overdrafts could be far cheaper for consumers, suggests price comparison site FairMoney.com.
Currently, HSBC offers rates of 3.3 per cent APR to 16.9 per cent APR for personal loans, while its new announcement reforming overdraft fees would increase this rate by more than 100 per cent to 39.9 per cent APR.
“How banks can expect the most vulnerable to cough up an extra 100 per cent in interest charges is scandalous,” says Roger Gewolb, founder of FairMoney.com.
“At this time of year, millions of consumers will see their expenditure vastly increased. With early December pay to cover Christmas and the long wait until January pay, this is exactly the time that the vulnerable will spiral into debt.”
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